JGBs skid as Nikkei's rally on weaker yen undermines demand

By Lisa Twaronite TOKYO, Dec 13 (Reuters) - Japanese government bonds tumbledon Thursday after an uninspiring 5-year auction failed to bluntthe impact of surging Japanese equities, pushing benchmarkyields away from last week's 9-1/2-year low. JGBs tracked a drop in U.S. Treasuries prices after the U.S.Federal Reserve announced a new bond buying programme in theprevious session, while Japan's stock market rally alsoundermined demand. The Nikkei gained 1.7 percent to close at aneight-month high, led by a rally in exporters, as the yen dropped to its lowest level since March against the dollar.

Yields on 10-year JGBs added 2.5 basis pointto a two-week high of 0.725 percent, moving away from lastweek's low of 0.685 percent, which was the lowest since June2003. Ten-year JGB futures for March ended down 0.30point at 144.40 point. "We are very cautious of these levels. It might look like adip to those investors who are still bullish, but we remainneutral for now, cautious of a bearish bias going forward," saidMaki Shimizu, senior strategist at Citigroup Global MarketsJapan. "Below 0.7 percent for 10-year yields cannot be justified,but until last week, the momentum was heading toward even lowerlevels for yields," she said. The Fed said it will buy $45 billion in Treasuries eachmonth on top of the $40 billion per month of mortgage-backedbonds it started buying in September. "The Fed's move adds to pressure already on the BOJ to actnext week," said a fixed-income fund manager at a European assetmanagement firm in Tokyo. The Bank of Japan will meet on Dec. 19-20, and will mostlikely increase its asset-buying and lending programme,currently at 91 trillion yen ($1.1 trillion), by another 5-10trillion yen, sources have said.

Japan's general election on Sunday is also likely to resultin more pressure on the BOJ to ease further. The oppositionLiberal Democratic Party is likely to secure a majority, and itsleader, Shinzo Abe, is already pushing the central bank to takeaggressive monetary steps. His pronouncements led to theso-called "Abe trade" in recent weeks, characterised mainly by aweaker yen. "Initially, 'Abe trades' in fixed income seemed to focusmore on the negative aspects such as fear of fiscaldeterioration and loss of central bank independence, butrecently we are starting to see more positioning for economicrecovery," said Neale Vincent, strategist at Nomura Securitiesin Tokyo. "The curve past 10-years likely can remain steep while 10'sare between 0.7 percent and 0.8 percent but flatten outside ofthat range. When we got below 0.7 percent in 10's recently,investors started to take profits in that sector and shift upthe curve," he said. If the 10-year yields rise above 0.8 percent, the long endshould attract strong dip buying from life insurers, he added. The yield curve steepened on Wednesday as the superlongsector underperformed, with yields on 30-year JGBs adding 4.5 basis points to 1.940 percent, whilethose on 20-year bonds rose 4 basis points to1.695 percent, their highest since Nov. 1. The Ministry of Finance offered 2.5 trillion yen of 5-yearnotes on Thursday with a coupon of 0.2 percent, matching that ofthe previous seven sales. The lowest accepted price of 100.17was in line with market expectations, but the sale'sbid-to-cover ratio came in at 3.54, down from 4.96 at lastmonth's sale. The tail between the average and lowest acceptedprices widened slightly to 0.01 from zero last month. The 5-year yield rose half a basis point to0.165 percent.